Inferring comparative advantage via entropy maximization

Abstract

We revise the procedure proposed by Balassa to infer comparative advantage, which is a standard tool in Economics to analyze specialization (of countries, regions, etc). Balassa’s approach compares a country’s export of a given product with what would be expected from a benchmark based on the total volumes of countries and product flows. Based on results in the literature, we show that implementing Balassa’s idea leads to conditions for estimating parameters conflicting with the information content of the model itself. Moreover, Balassa’s approach does not implement any statistical validation. Hence, we propose an alternative procedure to overcome such a limitation, based upon the framework of entropy maximization and implementing a proper test of hypothesis: the ‘key products’ of a country are, now, the ones whose production is significantly larger than expected, under a null-model constraining the same amount of information defining Balassa’s approach. What we found is that country diversification is always observed, regardless of the strictness of the validation procedure. Besides, the ranking of countries’ fitnesses is only partially affected by the details of the validation scheme employed for the analysis while large differences are found to affect the rankings of product complexities. The routine for implementing the entropy-based filtering procedures employed here is freely available through the official Python Package Index PyPI.